Standards of Investment Protection
Edited by August Reinisch
INTRODUCTION
The focus of expropriation law has shifted from
direct to indirect expropriation and to ascertaining
at what stage a governmental measure constitutes
and indirect, de facto, or creeping expropriation
What is indirect expropriation?
 occurs when a state takes effective control
of, or otherwise interferes with the use,
enjoyment or benefit of, an investment,
strongly depreciating its economic
value, even without a direct taking of
property. But there is no commonly accepted
definition of indirect expropriation;
ascertaining whether it has occurred will
depend on the facts and on the treaty
language, and on how both are interpreted
by the dispute settlement body
Particular emphasis will be put on the judicial and
arbitral practice with regard to the determination of
a ‘public purpose’, of ‘non-discrimination’, ‘due
process’, and the level of ‘compensation’
LEGALITY REQUIREMENTS under GENERAL
INTERNATIONAL LAW
De Sabla case
 ‘acts of a government in depriving an alien of
his property without compensation impose
international responsibility
The first Special Rapporteur of the International Law
Commission
 Expropriation of foreigners may lead to
international responsibility
 UNLESS carried out in conformity with
certain internationally require
preconditions: (a) public utility, (b) public
interest (c) non-discrimination (d) and lack
of arbitrariness (some will refer (d) to this as
due process)
Par. 4 of the 1962 UNGA Resolution on Permanent
Sovereignty 1803 over Natural Resources
 Nationalization, expropriation or
requisitioning shall be based on grounds or
reasons of public utility, security or the
national interest which are recognized as
overriding purely individual or private
interests, both domestic and foreign. In such
cases the owner shall be paid appropriate
compensation, in accordance with the rules
in force in the State taking such measures in
the exercise of its sovereignty and in
accordance with international law.
 In a nutshell, the above text remained partly
ambiguous, but it clearly expressed a
consensus that expropriation had to be in
the public interest and accompanied by
compensation
However, subsequent UNGA resolutions in
attempting to establish a New International
Economic Order retracted from that proposition and
merely affirmed the right to expropriate without
any firm international obligation to compensate
foreign owners or to respect the requirement of
public utility or the like
 This now refers to the principle of nationality
 This is an expression of the state’s
sovereignty in order to safeguard their
natural resources
 This implies that the state determines the
amount of possible compensation and the
mode of payment
 In case of disputes, it shall be settled in
accordance with the national legislation of
each state carrying out such measure
Art. 2 of the 1974 Charter of Economic Rights and
Duties of States
 Each State has the right to nationalize,
expropriate or transfer ownership of
foreign property, in which case appropriate
compensation should be paid by the State
adopting such measures, taking into account
its relevant laws and regulations and all
circumstances that the State considers
 pertinent. In any case where the question of
compensation gives rise to a controversy, it
shall be settled under the domestic law of
the nationalizing State and by its tribunals,
unless it is freely and mutually agreed by all
States concerned that other peaceful means
be sought on the basis of the sovereign
equality of States and in accordance with the
principle of free choice of means
The doctrinal controversy arose from the two
resolutions 1974 (Charter of Economic Rights and
Duties of States and New International Economic
Order)
Nevertheless, the traditional legality requirements
are still upheld by many commentators. According
to the Restatement:
 A state is responsible under International
law for injury resulting from a taking by the
state of the property of a national of another
state that:
 A) is not for public purpose
 B) is discriminatory
 C) not accompanied by provisions of just
compensation
UCTAD added the requirement of due process as a
legality requirement. This is not always included,
and if included, may vary.
N.B. Due process in IL is more procedural rather than
substantive
Public Purpose, non-discriminatory are generally
accepted
However, compensation was a widely accepted
principle. There was no universal agreement
relating to the manner of assessment and
compensation
Sornajah opines
 that within the context of the rules on
expropriation, the issue of whether full
compensation represents international law
had remained a contested proposition.
 He does acknowledge, however, that there is
general agreement that a taking which lacks
a public purpose and a discriminatory
taking are illegal in international law’
LEGALITY REQUIREMENTS IN INTERNATIONAL
INVESTMENT AGREEMENT
Hull Formula
 Demanding prompt, adequate and effective
compensation
2004 US Model BIT
Neither Party may expropriate or nationalize a
covered investment either directly or indirectly
through measures equivalent to expropriation or
nationalization (“expropriation”), except:
(a) for a public purpose;
(b) in a non-discriminatory manner;
(c) on payment of prompt, adequate, and effective
compensation; and
(d) in accordance with due process of law and
Article 5 [Minimum Standard of
Treatment]
1998 China/Poland BIT
 Either Contracting Party may for security
reasons or a public purpose, nationalize,
expropriate or take similar measures
(hereinafter referred to as ‘expropriatory
measures’) against investments investors of
the other Contracting Party in its territory.
Such expropriatory measures shall be non-
discriminatory and shall be taken under due
process of national law and against
compensation
1991 Czechoslovakia/Netherlands BIT
Neither Contracting Party shall take any measures
depriving, directly or indirectly, investors of the
other Contracting Party of their investments unless
the following conditions are complied with:
(a)the measures are taken in the public interest and
under due process of law;
(b) the measures are not discriminatory;
(c) the measures are accompanied by provision for
the payment of just compensation
2004 German Model BIT
 Investments by investors of either
Contracting State shall not directly or
indirectly be expropriated, nationalized or
subjected to any other measure the effects
of which would be tantamount to
expropriation or nationalization in the
territory of the other Contracting State
except for the public benefit and against
compensation
THE INTERPRETATION GIVEN TO THE LEGALITY
REQUIREMENTS IN THE PRACTICE OF INVESTMENT
ARBITRATION
PUBLIC PURPOSE
Public purpose/interest has long been considered
part of customary international law.
Article 4 of the 1962 General Assembly Resolution
No. 1803 on Permanent Sovereignty over Natural
Resources
 Public purpose - grounds or reasons of public
utility, security or the national interest which
are recognized as overriding purely
individual or private interests’
Public purpose can be found in almost all the IIA
(International Investment Agreements).
Most arbitral and judicial pronouncements
addressing the legality requirements for
expropriations reaffirm the public purpose
requirement—though some of them may have given
rise to conflicting interpretation
Shufeldt Claim
 it [was] perfectly competent for the
Government of Guatemala to enact any
decree they like and for any reasons they see
fit, and such reasons are no concern of this
tribunal
Norwegian Shipowners’ Claim case
 the tribunal’s reference to the ‘power of a
sovereign state to expropriate, take or
authorize the taking of any property within
its jurisdiction which may be required for the
“public good” or for the “general welfare”
’may be regarded as a requirement of US
constitutional law as well as of international
law
German Interests in Polish Upper Silesia
 Expropriation for reasons of public utility,
judicial liquidation and similar measures’
were not prohibited by the Geneva
Convention.
 One may thus conclude that ‘public utility’
was regarded by the PCIJ to constitute one
of the legality requirements for an
expropriation.
Walter Fletcher Smith Claim case
 Became a rare exception to the
abovementioned cases which in turn reflects
the prevailing view on International Law
 Expropriation proceedings were not, in good
faith, for the purpose of public utility’. In the
arbitrator’s view, the violent taking of a
piece of land belonging to a US national in
order to serve for the enlargement of an
urbanization project did not conform to the
public purpose test
LIAMCO case
 States were almost totally free to decide on
the public purpose of takings by stating that
‘[m]otives are indifferent to international
law, each State being free to judge for itself
what it considers useful or necessary for the
public good’.
 the public utility principle is not a necessary
requisite for the legality of a nationalization’.
 Nevertheless, the arbitrator found that the
language of the nationalization law ‘[ . . . ]
was drafted in a general non-discriminatory
language, which clearly indicated that
Libya’s motive for nationalization was its
desire to preserve the owner- ship of its oil’.
Though he stressed the non-discrimination
obligation to the point of declaring the public
 purpose requirement irrelevant, this
language would clearly also satisfy a public
purpose test.
British Petroleum v Libya
 the public purpose requirement and found
that the expropriation was unlawful because
it was politically motivated as an act of
retaliation for a British foreign policy
decision. In the words of the tribunal, the
measures had been adopted ‘[...] for purely
extraneous political reasons and [ . . . ]
arbitrary and discriminatory in character’
The following case laws reaffirm the relevance of
the public purpose test in which the tribunal
declared that expropriation/nationalization are
unlawful because of non-observance of public
purpose
 Iran-US Claims tribunal
 American International Group
 INA Corp – expropriations for a public
purpose are not per se unlawful
 Amoco case – precise definition of public
purpose has neither been agreed upon in
international law nor even suggested and as
a result of the modern acceptance of the
right to nationalize, this term is broadly
interpreted, and the states, in practice, are
granted extensive discretion
However, ICSID concluded that expropriatory acts
had been unlawful because they did not serve a
public purpose
LETCO case
 ICSID tribunal found that the revocation of a
concession was not for a bona fide public
purpose, was discriminatory and was not
accompanied by an offer of appropriate
compensation’.
ADC v Hungary
 a treaty requirement for ‘public interest’
requires some genuine interest of the public.
If mere reference to ‘public interest’ can
magically put such interest into existence
and therefore satisfy this requirement, then
this requirement would be rendered
meaningless since the Tribunal can imagine
no situation where this requirement would
not have been met
 the ADC tribunal clearly rejected the view,
espoused by some arbitral awards, that
States are basically free to determine
whatever they wish to con- sider as public
purpose or interest. Instead, it demanded a
‘genuine interest of the public’ and de facto
reversed the burden of proof by requiring
the expropriating State to demonstrate such
genuine public interest.
Siemens v Argentina
 Demonstrates that ICSID tribunals are willing
to examine the legality of expropriations.
The tribunal found that the fulfilment of the
public interest requirement contained in the
applicable Argentina/Germany BIT was
questionable.
NON-DISCRIMINATION
It is a standard element both in customary
international law and in most treaty provisions
The precise content of this non-discrimination
requirement remains unclear
According to the Restament
 discriminatory taking is one that singles out
a particular person or group of people
without a reasonable basis
Sometimes, it is even asserted that ‘the non-
discrimination requirement demands that
governmental measures, procedures and practices
be non-discriminatory even in the treatment of
members of the same group of aliens
Examples of Illegal Takings
 Racially motivated expropriations
 Aryanization policy
  Taking of property belonging to ethnic
Indians by Idi Amin regime in Uganda
In practice, it was often the singling out of particular
nationals, often as a result of political retaliation,
which was considered to constitute a discriminatory
taking.
British Petroleum v Libya
the taking of the property by the Respondent of the
property clearly violates public international law as
it was made for purely extraneous political reasons
and was arbitrary and discriminatory in character
LIAMCO case
A purely discriminatory nationalization is illegal and
wrongful
On the other hand, even the fact that one foreign
investor is expropriated while another one is not
does not necessarily imply a discriminatory taking if
there were ‘adequate reasons’ for distinguishing
Aminoil case
Nationalisation of Aminoil was not thereby tainted
with discrimination. First of all, it has never for a
single moment been suggested that it was because
of the American nationality of the Company that the
Decree Law was applied to Aminoil’s Concession.
Next, and above all, there were adequate reasons
for not nationalising Arabian Oil.
LETCO
The tribunal found evidence that areas of the
concession taken away from LETCO were granted to
other foreign-owned companies run by people who
were “good friends” of the Liberian authorities’128
it concluded, inter alia, that ‘the taking of LETCO’s
property was discriminatory
ADC v Hungary
In order for a discrimination to exist, particularly in
an expropriation scenario, there must be different
treatments to different parties
DUE PROCESS
Often referred to as a typical legality requirement
for an expropriation. Whether it can be seen as a
customary international law requirement remains,
however, less certain.
Due process’ is often provided for in BITs and other
IIAs
 any expropriation must be made or
accomplished ‘under due process of law’ or
‘in accordance with due process of law is a
provision that can be found in many but not
all investment requirements
According to UNCTAD
 The due process prerequisite is usually
understood as a requirement to provide for
a possibility to have the expropriation and, in
particular, the determination of the amount
of compensation reviewed before an
independent body
1991 UK Model BIT
The national or company affected shall have a right,
under the law of the Contracting Party making the
expropriation, to prompt review, by a judicial or
other independent authority of that Party, of his or
its case and of the valuation of his or its investment
in accordance with the principles set out in this
paragraph
Austrian BIT
Due process of law includes the right of an investor
of a Contracting Party which claims to be affected by
expropriation by the other Contracting Party to
prompt review of its case, including the valuation of
its investment and the payment of compensation in
accordance with the provisions of this Article by a
judicial authority or another competent and
independent authority of the latter Contracting
Party
2004 Canadian Model BIT
The Investor affected shall have a right to prompt
review, under the law of the Contracting Party
making the Expropriation, by a judicial or other
competent and independent authority of that
Contracting Party, of its case, of the valuation of its
Investment, and of the payment of compensation,
in accordance with the principles set out in
paragraph
2002 Russian Federation/Thailand BIT
An expropriation must be made for public interests
in accordance with the procedure established by the
laws of the Contracting Party
China/Poland BIT
Expropriatory measures shall be taken under due
process of national law
Some BITs actually set the due process prerequisite
somewhat apart from the public purpose, non-
discrimination, and compensation requirements.
Indeed, since the due process prerequisite is not so
much a substantive requirement but rather a
procedural obligation in order to guarantee
compliance with the substantive requirements it
appears sensible to differentiate in this context
Goetz v Burundi
To be internationally lawful, the measure must not
only be supported by valid reasons, it must also have
been taken in accordance with a lawful procedure
ADC v Hungary
Some basic legal mechanisms, such as reasonable
advance notice, a fair hearing and an unbiased and
impartial adjudicator to assess the actions in
dispute, are expected to be readily available and
accessible to the investor to make such legal
procedure meaningful. In general, the legal
procedure must be of a nature to grant an affected
investor a reasonable chance within a reasonable
time to claim its legitimate rights and have its claims
heard. If no legal procedure of such nature exists at
all, the argument that ‘the actions are taken under
due process of law’ rings hollow
General conclusions on the ‘due process’
requirement must remain tentative. As opposed to
the public purpose and the non-discrimination pre-
requisite, the due process requirement seems to be
less certainly established in customary
international law. It is, however, very widely used in
IIAs where it appears in different forms. Sometimes,
the due process condition is phrased as a mere
legality requirement according to which the
expropriation has to be effectuated in conformity
with national law and procedure, whereas in a
number of IIAs due process expressly requires a
right to have the expropriation and, in particular,
the compensation decision reviewed. The limited
case law suggests that a fair procedure offering the
possibility of judicial review is crucial.
COMPENSATION
The principle Full compensation, until the first half
of the 20th century, was fairly well established in
international practice
De Sabla
Acts of a government in depriving an alien of his
property without compensation impose
international responsibility’
Cordell Hull
 No government is entitled to expropriate
private property, for what- ever purpose,
without provision for prompt, adequate and
effective payment therefore
 Widely regarded as an expression of
customary international standards
Norwegian Shipowners’ Claims case
International law and justice are based upon the
principle of equality between States. No State can
exercise towards the citizens of another civilised
State the ‘power of eminent domain’ without
respecting the property of such foreign citizens or
without paying just compensation as determined by
an impartial tribunal, if necessary
The traditional consensus as found in the Hull
formula is no longer generally accepted as an
expression of customary international law.
The opinion seems to prevail that there is still a
customary international law requirement to make at
least some compensation in case of expropriation
IIAs often contain provisions which clarify that ‘fair
market value’ would be regarded as ‘adequate’ or
‘just’ compensation

France/Hong Kong BIT
Compensation shall amount to the real value of the
investment immediately before the deprivation or
before the impending deprivation became public
knowledge whichever is the earlier, shall include
interest at a normal commercial rate until the date
of payment, shall be made without delay, be
effectively realizable and be freely convertible
Aminoil
the determination of the amount of an ‘appropriate’
compensation is better carried out by means of an
enquiry into all the circumstances relevant to the
particular concrete case, than through abstract
theoretical discussion
American International Group v Iran
 That formula was well-advised, and
justifiably brings to mind the fact that, with
reference to every long-term contract,
especially such as involve an important
investment, there must necessarily be
economic calculations, and the weighing-up
of rights and obligations, of chances and
risks, constituting the contractual
equilibrium
 It is a general principle of public international
law that even in a case of a lawful
nationalization the former owner of the
nationalized property is normally entitled to
compensation for the value of the property
taken
Ebrahimi case
 The Tribunal believes that, while
international law undoubtedly sets forth an
obligation to provide compensation for
property taken, international law theory and
practice do not support the conclusion that
the ‘prompt adequate and effective’
standard represents the prevailing standard
of compensation. Rather, customary
international law favors an ‘appropriate’
compensation standard. The prevalence of
the ‘appropriate’ compensation standard
does not imply, however, that the
compensation quantum should be always
‘less than full’ or always ‘partial
 Compensation must equal the full value of
the expropriated property as it stood on the
date of taking
1995 Treaty of Amity
Property shall not be taken except for a public
purpose, nor shall it be taken without the prompt
payment of just compensation. Such compensation
shall be in an effectively realizable form and shall
represent the full equivalent of the property taken
Santa Elena case
 The tribunal was of the opinion that
international law permits the Government of
Costa Rica to expropriate foreign-owned
property within its territory for a public
purpose and against the prompt payment of
adequate and effective compensation’.
 With regard to the required level of the
‘adequate’ compensation the tribunal
merely noted that there was no dispute
between the parties as to the applicability of
the principle of full compensation for the fair
market value of the Property, ie, what a
willing buyer would pay to a willing seller’
Whether the compensation requirement demands
that compensation has been actually paid?
 the LETCO case, the tribunal held that the
expropriating government would have to
show that its action was ‘accompanied by
payment (or at least the offer of payment) of
appropriate compensation’. Since the taking
of LETCO’s property was in fact ‘not
accompanied by an offer of appropriate
compensation’196 it was not justified
According to the Goetz case
 The applicable treaty required an adequate
and effective indemnity; unlike certain
domestic rights as regards expropriation, it
does not require prior compensation’
  The mere fact that compensation has not yet
been paid does not render an expropriation
illegal
While the precise amount of compensation due in
case of expropriation may remain controversial as a
matter of customary international law, the general
obligation to provide for some compensation is
clearly upheld by the jurisprudence of investment
tribunals—both as a matter of investment treaty
law and of general international law.
Since treaties usually contain rather detailed rules
on the appropriate level of compensation, as well as
also often on the valuation methods concerning
expropriated property, the issue of the amount of
compensation plays a less prominent role than the
highly politicized debate may suggest
IMPLICATIONS of the LEGALITY/ILLEGALITY of an
EXPROPRIATION for REMEDIES
The generally accepted principle is, compensation is
due in cases of expropriation
If compensation is not paid or atleast offered,
and/or the legality requirements are not fulfilled, an
expropriation becomes illegal and State
responsibility is triggered
N.B.
The problem lies in this chapter is the distinction
between lawful and unlawful/illegal expropriation
and the compensation due to the aggrieved
investor/alien
This nota bene is just my ignorant opinion, you may
or may not rely on this, because who am I, right?
If it is the compensation is lawful then claimant is
entitled to fair compensation for what was
expropriated, no damages for such breach. Usually
this is in the form of fair market value (see ADC v
Hungary)
If it is illegal then the claimant is entitled to
reparation (see Charzow Factory; Metalclad case)
Case Laws:
Walter Fletcher Smith Claim
The property should be restor to the claimant
Charzow Factory
 Bes known formulation of customary
international law
 Reparation must wipe out all the
consequences of the illegal act and
reestablish the situation, in all probability,
have existed if the act had not been
committed
 Restitution in kind or, if not possible,
payment of sum corresponding to the value
which restitution in kind would bear
SPP v Egypt
 the Claimants are seeking ‘compensation’
for a lawful expropriation, and not
‘reparation’ for an injury caused by an illegal
act such as a breach of contract. The cardinal
point in determining the appropriate
compensation is that Claimants are entitled
to receive fair compensation for what was
expropriated rather than damages for
breach of contract
Metalclad
 where the state has acted contrary to its
obligations, any award to the claimant
should, as far as is possible, wipe out all the
con- sequences of the illegal act and
reestablish the situation which would in all
probability have existed if that act had not
been committed (the status quo ante)
CMS v Argentina
 Restitution is the standard used to
reestablish the situation which existed
before the wrongful act was committed,
provided this is not materially impossible
and does not result in a burden out of
proportion as compared to compensation
ADC v Hungary
  The amount of compensation must
correspond to the market value of the
expropriated investments at the moment of
the expropriation’ and that the amount of
this compensation may be estimated
according to the laws and regulations of the
country where the expropriation is made
cases of lawful expropriations. They largely concur
that where an expropriation was carried out either
not for a ‘public purpose’, in a ‘discriminatory’
fashion, or not in accordance with ‘due process’,
damages for an internationally wrongful act are due

Siemens A.G. v Argentina

 The law applicable to the determination of
compensation for a breach of such Treaty
obligations is customary international law.
The Treaty itself only provides for
compensation for expropriation in
accordance with the terms of the Treaty

CONCLUSION

The fact that recent investment arbitration has been

dominated by issues of indirect expropriation with
tribunals focusing on the question whether certain
State measures amounted to expropriation, does
not mean that the traditional legality requirements
for the expropriation of foreign investment have lost
their importance.

Traditional criteria of:

1. Public purpose
2. Non-discrimination
3. Due process
4. Compensation,

The abovementioned criteria are often found in BITs

or IIAs, or other investment instruments

Jurisprudence demonstrates that tribunals are in

fact willing to engage in a genuine investigation of
whether the legality requirements are fulfilled.

Investment tribunals are fairly consistent in

requiring compensation, or at least an offer of
compensation, in order to regard an expropriation
as lawful. The precise amount of compensation will
usually be guided by the express treaty provisions
on expropriation.

Tribunals have been rather consistent in permitting

the application of these treaty provisions only in